Central Bank decisions and post-meeting communications have continued to dominate the economic agenda. Although I give the Central Bank the benefit of the doubt and will wait and see the results of recent decisions, it is clear that the policy rate cut accompanying the increased reserve requirement has generated reaction from some analysts who think price stability should be the overriding concern of a central bank. Since the expectations channel is vital for transmitting monetary policy to the real economy, inability to shape expectations as desired could be an obstacle to the effectiveness of the latest efforts. I think the Central Bank of Turkey got this message from market players. In return, the Central Bank is trying to convince decision-makers that the rate cut has nothing to do with the inflation outlook, which is very promising in the short term; it is indeed an element in a policy mix that has two main goals.
According to the Central Bank, the first goal of the current policy mix is reducing the pace of credit growth and the second goal is fostering longer maturity periods for capital inflows. It seems that a lower policy rate is very much related to the second goal of discouraging short-term capital inflows mainly in the form of swap transactions with non-residents. As a supplement to this, the Central Bank also widens the corridor between overnight borrowing and lending rates so as to allow fluctuations in the short-term interest rates when needed. As Central Bank Gov. Durmuş Yılmaz confirmed in a TV interview, this strategy was quite successful in driving away hot money and causing the recent depreciation of the Turkish Lira. I also saw from banks’ rapidly shrinking off-balance sheet transactions that it is actually happening. This is important for improving the quality of the capital account and avoiding exchange rate movements detached from economic fundamentals. However, it could also imply that another rate cut would not be needed if the second goal were accomplished. On the first goal, the Central Bank said higher effective required reserve ratios are anticipated to curb credit growth through the cost and liquidity channels starting from January. This means the composition and the direction of the policy instruments in the forthcoming period will be dependent on credit growth and capital flows data.
The Central Bank sent clear signals about the inflation outlook in the summary notes from its monetary policy meeting as an important part of its communication strategy. First, headline inflation is expected to be close to the end-2010 target of 6.5 percent. Second, inflation will decline in the forthcoming period. Third, the output gap still exists and will help to limit the pass-through from commodity prices to the prices of core goods and services. However, the bank remained cautious by highlighting the sharp increases in agricultural commodity prices (cotton and wheat) and the rapid pace of domestic demand. The bank said the impact of commodity prices on general price-setting behavior should be closely monitored.
Last but certainly not the least, the Central Bank clearly said the net impact of the macro-prudential policy package implemented – and to be implemented – both by itself and at other institutions should be on the tightening side. While this statement makes measuring the policy stance even more difficult, it also increases the importance of the Central Bank’s credibility. So it all depends on do you trust the bank or not?...
The Central Bank has been harshly criticized for not mentioning the importance of fiscal discipline in the fight against the current account deficit while bringing new burdens to the banking system. In the meeting notes, the Central Bank said increasing government savings is essential for containing the risks regarding the current account deficit and applauded the control of budget expenditures during 2010 as envisaged in the country’s medium-term program, while underlining the vitality of maintaining fiscal discipline in the period ahead.
31 Aralık 2010 Cuma
24 Aralık 2010 Cuma
Second act of hocus-pocus plan...
On Dec. 17, one day after the Central Bank of Turkey decided to cut rates, an article titled “Turkey’s Financial Conundrum” was published in the Wall Street Journal. Although it displayed opposite views about the decision and refrained from early judgment, the tone of the article was rather cynical as you might also extract from the sentence below:
“The bank’s monetary policy committee on Friday completed the second act of a hocus-pocus plan to simultaneously slow booming credit growth and curb the inflows of hot money that’s threatened to destabilize Turkey’s rapid recovery. Policymakers in Ankara have gambled that cutting rates to dissuade speculative investors is less risky than firing a domestic consumer boom that some fear could see the economy overheat. It’s too early to judge whether the complicated policy shift will have the desired effect: reducing hot money flows and cooling runaway lending rates. But the policy push has split the market. Some have praised the [Central Bank]’s boldness, acknowledging that rate-setters are in a tough spot trying to square competing objectives. Others are less sanguine, warning that the abrupt shift in policy calls the bank’s credibility into question.”
In an environment of uncertainty and unconventional approaches to monetary policy globally, as well as general elections and a Central Bank governor change locally in 2011, one could easily understand why there are different views and second thoughts about the same decision. Exactly for that reason, in my previous article, I underlined the importance of the Central Bank’s credibility in the eyes of market players since measuring how much increase in required reserve ratios would be enough to offset the interest rate cut is not very straightforward. If you want my honest opinion, the Central Bank has built up huge credibility during the global crisis by starting pre-emptive rate cuts that later on many others followed. So I beg to differ from those who see problems and risks in this policy mix. Clearly, the Central Bank is planning to ride on possible positive surprises from the inflation front. I can imagine how skeptics might react if headline inflation fell rapidly and reached 5 percent or lower at the end of February next year. The first test for this strategy will be held with December inflation, where I expect another fall in year-on-year comparisons. This could mean success for the Central Bank in reaching the 2010 target of 6.5 percent.
Capital war advances in all fronts
In the Monetary and Exchange Rate Policy announcement for 2011, on Dec. 21, the Central Bank said it would continue with the policy to increase the reserve requirement gradually for short-term Turkish Lira liabilities and also may consider changing the reserve requirement of foreign currency liabilities according to maturity composition. This implicitly means that the bank will continue with policy rate cuts in the following meetings to smooth the tightening effect of the reserve requirement increase. Another move from the Central Bank could be to widen the scope of the reserve requirements for foreign exchange liabilities. In that context, the Central Bank said banks’ off-balance sheet activities are going to be monitored closely. This means that the Central Bank may consider applying reserve requirements to FX swaps, which is another source for creating cheap Turkish Lira funding.
New target for Central Bank?
With its recent precautions and mention of possible measures it could take, the Central Bank seems to have adopted an implicit target for the current account deficit, as they expect it in 2011 to approach the level forecasted in the Medium Term Program ($42.2 billion, or 5.4 percent of GDP). However, consensus expectation for 2010 suggests the current account deficit will approach $45 billion this year, thus making such an assertion quite ambitious. Moreover, reaching this target necessitates a significant slowdown in economic activity especially in domestic demand. Therefore, striving for a narrower current account deficit would eventually mean prudent policy making thus confidence-boosting development for the government in an election year.
“The bank’s monetary policy committee on Friday completed the second act of a hocus-pocus plan to simultaneously slow booming credit growth and curb the inflows of hot money that’s threatened to destabilize Turkey’s rapid recovery. Policymakers in Ankara have gambled that cutting rates to dissuade speculative investors is less risky than firing a domestic consumer boom that some fear could see the economy overheat. It’s too early to judge whether the complicated policy shift will have the desired effect: reducing hot money flows and cooling runaway lending rates. But the policy push has split the market. Some have praised the [Central Bank]’s boldness, acknowledging that rate-setters are in a tough spot trying to square competing objectives. Others are less sanguine, warning that the abrupt shift in policy calls the bank’s credibility into question.”
In an environment of uncertainty and unconventional approaches to monetary policy globally, as well as general elections and a Central Bank governor change locally in 2011, one could easily understand why there are different views and second thoughts about the same decision. Exactly for that reason, in my previous article, I underlined the importance of the Central Bank’s credibility in the eyes of market players since measuring how much increase in required reserve ratios would be enough to offset the interest rate cut is not very straightforward. If you want my honest opinion, the Central Bank has built up huge credibility during the global crisis by starting pre-emptive rate cuts that later on many others followed. So I beg to differ from those who see problems and risks in this policy mix. Clearly, the Central Bank is planning to ride on possible positive surprises from the inflation front. I can imagine how skeptics might react if headline inflation fell rapidly and reached 5 percent or lower at the end of February next year. The first test for this strategy will be held with December inflation, where I expect another fall in year-on-year comparisons. This could mean success for the Central Bank in reaching the 2010 target of 6.5 percent.
Capital war advances in all fronts
In the Monetary and Exchange Rate Policy announcement for 2011, on Dec. 21, the Central Bank said it would continue with the policy to increase the reserve requirement gradually for short-term Turkish Lira liabilities and also may consider changing the reserve requirement of foreign currency liabilities according to maturity composition. This implicitly means that the bank will continue with policy rate cuts in the following meetings to smooth the tightening effect of the reserve requirement increase. Another move from the Central Bank could be to widen the scope of the reserve requirements for foreign exchange liabilities. In that context, the Central Bank said banks’ off-balance sheet activities are going to be monitored closely. This means that the Central Bank may consider applying reserve requirements to FX swaps, which is another source for creating cheap Turkish Lira funding.
New target for Central Bank?
With its recent precautions and mention of possible measures it could take, the Central Bank seems to have adopted an implicit target for the current account deficit, as they expect it in 2011 to approach the level forecasted in the Medium Term Program ($42.2 billion, or 5.4 percent of GDP). However, consensus expectation for 2010 suggests the current account deficit will approach $45 billion this year, thus making such an assertion quite ambitious. Moreover, reaching this target necessitates a significant slowdown in economic activity especially in domestic demand. Therefore, striving for a narrower current account deficit would eventually mean prudent policy making thus confidence-boosting development for the government in an election year.
20 Aralık 2010 Pazartesi
In Central Bank We Trust...
The Central Bank is finally taking action against the expanding current account deficit, which is perceived as the most significant threat against the financial stability, a phenomenon that is as important for the Bank as sustaining the price stability. Ahead of the Monetary Policy Meeting on December 16 and the 2011 Monetary and Foreign Exchange Rate Policy due December 21, the Central Bank used all the communication channels to give the message that the monetary policy stance may change. To justify this shift in the monetary policy the Bank says that the additional monetary easing in developed countries magnifies the risks of boosting capital inflows and further widening current account deficit. The Bank states that the current account deficit may grow through two channels; an acceleration of credit, domestic demand and demand for imported goods, due to an increased availability of ample low-cost borrowing opportunities, or an acceleration of demand for imported goods due to the current real appreciation trend of TRY reaching levels that are inconsistent with economic fundamentals. The Bank describes the new monetary policy framework in this environment as tightening via macroprudential instruments to prevent acceleration in credit, while reducing short-term interest rates in a controlled fashion to curb the appreciation trend in the exchange rate. The Bank believes this is the ideal policy mix. Now, we have an idea about the general terms of the new policy framework. However, there are question marks as to how much the Bank would cut the policy rate and raise the reserve requirements. I will try to answer these questions. The level of the real interest rate would mark the lower boundary for the policy rate, while CBRT Deputy Governor Basci gave the first clues regarding the macroprudential tools in his presentation held at the last weekend. The foremost objective of these measures is to provide incentives for the extension of maturities in all types of funding the Banks obtain from sources other than the Central Bank, while containing the money and the credit growth. Below I mention the first possible steps and my assessments regarding them in parentheses.
The financial stability measures to extend maturity: The purpose of the new measures will be to provide incentives to longer maturities for depositors as well as for international investors.
- Short-term deposit rates will settle at levels significantly below the longer term deposit rates. (This can be achieved by setting higher required reserve ratios for short term deposits, as well as by the policy rate cuts.)
- The CBT will take the necessary steps so that the average level of the short-term swap rates will form below long-term swap rate averages, while the volatility of short-term swap rates will materialize above those of the long-term rates. (While the swap rates would normally trade below the money market rates, by cutting the O/N borrowing rate to 1.5% and by letting the O/N repo rates to temporarily deviate from the policy rate the Central Bank already prepared the ground for this environment)
Financial stability measures to contain money and credit growth are as follows:
- The fall in long term interest rates is expected to be much more limited than that in short term interest rates. (The long term interest rates are what really matters for the credit rates. Therefore, if the Central Bank, by successfully managing the expectations, achieves to prevent the long term rates to decline as much as the policy rate cut, this may limit the credit growth.)
- The required reserve ratios will be increased primarily and especially for short term liabilities in gradual manner. (Given the fact the average maturity of deposits is 1-month, setting a different required reserve ratio for that segment may be an effective policy. In the meantime, the Bank now expands the funding channels of banks that are subject to required reserve to include the repo transactions)
- For containing the widening of the current account deficit, other public authorities in Turkey should also provide incentives for the extension of maturities in all types of funding while moderately and gradually tightening their macroprudential instruments. (Here, the Bank calls other institutions such as Finance Ministry and BRSA to use taxes and other instruments for the same purpose)
- The Central Bank will continue to tighten and loosen the short term funding amount at the policy rate as required by the circumstances. (The outstanding funding the Central Bank provides for the banking system hovers at TRY20bn and the level of O/N rates are affected by the changes in the funding size)
Some of these measures have been in use for some time, while some others are put into force at the Central Bank’s last MPC meeting and the remaining items (the new rules planned to motivate long term corporate bonds and eurobonds) on the list would be introduced depending on the ability of the economy officials to collaborate and synchronize.
On the other hand, the Central Bank believes that the significant drop in Turkey’s risk premium, the sharp decline in inflation expected in the following months (I anticipate CPI falling below 5% by February) and the likely acceleration in the portfolio inflows would give enough space for rate cuts. I assume that the real interest rate adjusted by the risk premium would determine the size of the rate cuts, which would be “measured” according to the Central Bank’s rhetoric. Even if the policy rate remains unchanged, real interest would rise if the risk premium and/or inflation expectations ease, the implication being a tighter monetary policy. The current risk premium of Turkey (that is 170 bps as measured by the EMBI+ Turkey) gives room for 150 bps rate cut in order to bring the monetary policy back to the loosest stance observed in the first half of the year (when the real interest rate was a negative 2.7%). This gives us the maximum amount of rate cut that is possible. As other criteria, the Central Banks says that the net impact of the measured policy rate cuts and tighter macroprudential tools to be contractionary. However, measuring how much increase in required reserve ratios would be enough to offset the interest rate cut is not very straightforward and the Central Bank’s credibility would play an important role. I believe that the Central Bank has been very credible for the markets over the recent period and I do not expect any problem on this side.
The financial stability measures to extend maturity: The purpose of the new measures will be to provide incentives to longer maturities for depositors as well as for international investors.
- Short-term deposit rates will settle at levels significantly below the longer term deposit rates. (This can be achieved by setting higher required reserve ratios for short term deposits, as well as by the policy rate cuts.)
- The CBT will take the necessary steps so that the average level of the short-term swap rates will form below long-term swap rate averages, while the volatility of short-term swap rates will materialize above those of the long-term rates. (While the swap rates would normally trade below the money market rates, by cutting the O/N borrowing rate to 1.5% and by letting the O/N repo rates to temporarily deviate from the policy rate the Central Bank already prepared the ground for this environment)
Financial stability measures to contain money and credit growth are as follows:
- The fall in long term interest rates is expected to be much more limited than that in short term interest rates. (The long term interest rates are what really matters for the credit rates. Therefore, if the Central Bank, by successfully managing the expectations, achieves to prevent the long term rates to decline as much as the policy rate cut, this may limit the credit growth.)
- The required reserve ratios will be increased primarily and especially for short term liabilities in gradual manner. (Given the fact the average maturity of deposits is 1-month, setting a different required reserve ratio for that segment may be an effective policy. In the meantime, the Bank now expands the funding channels of banks that are subject to required reserve to include the repo transactions)
- For containing the widening of the current account deficit, other public authorities in Turkey should also provide incentives for the extension of maturities in all types of funding while moderately and gradually tightening their macroprudential instruments. (Here, the Bank calls other institutions such as Finance Ministry and BRSA to use taxes and other instruments for the same purpose)
- The Central Bank will continue to tighten and loosen the short term funding amount at the policy rate as required by the circumstances. (The outstanding funding the Central Bank provides for the banking system hovers at TRY20bn and the level of O/N rates are affected by the changes in the funding size)
Some of these measures have been in use for some time, while some others are put into force at the Central Bank’s last MPC meeting and the remaining items (the new rules planned to motivate long term corporate bonds and eurobonds) on the list would be introduced depending on the ability of the economy officials to collaborate and synchronize.
On the other hand, the Central Bank believes that the significant drop in Turkey’s risk premium, the sharp decline in inflation expected in the following months (I anticipate CPI falling below 5% by February) and the likely acceleration in the portfolio inflows would give enough space for rate cuts. I assume that the real interest rate adjusted by the risk premium would determine the size of the rate cuts, which would be “measured” according to the Central Bank’s rhetoric. Even if the policy rate remains unchanged, real interest would rise if the risk premium and/or inflation expectations ease, the implication being a tighter monetary policy. The current risk premium of Turkey (that is 170 bps as measured by the EMBI+ Turkey) gives room for 150 bps rate cut in order to bring the monetary policy back to the loosest stance observed in the first half of the year (when the real interest rate was a negative 2.7%). This gives us the maximum amount of rate cut that is possible. As other criteria, the Central Banks says that the net impact of the measured policy rate cuts and tighter macroprudential tools to be contractionary. However, measuring how much increase in required reserve ratios would be enough to offset the interest rate cut is not very straightforward and the Central Bank’s credibility would play an important role. I believe that the Central Bank has been very credible for the markets over the recent period and I do not expect any problem on this side.
13 Aralık 2010 Pazartesi
Turkish Economic Outlook 2011
Summary: There has been a distinctly superb performance in 2010, as the economic activity has achieved a sharp rebound, making up for the much severer collapse than other countries during the crisis. However, the Q3 GDP figures suggest that the output has returned to the pre-crisis levels and the recovery pace would likely enter into a slower trajectory in 2011.
Under this broad picture;
1) Growth: I envisage that the economy would post a slower 5.0% growth next year, after expanding by a robust 8.0% this year.
2) Employment and Unemployment Rate: I anticipate unemployment rate falling to 11.9% on average this year, down from 14.0% in 2009. On the other hand, the downtrend in unemployment rate is likely to slow next year in tandem with a softer economic growth. Due to the high rate of growth in population at 1.5% and to the migration of labor force from agricultural sector to the other sectors, I believe that only a limited 0.5 pp drop in unemployment rate to 11.4% can accompany the economic growth that we estimate for next year.
3) Current Account Deficit and External Financing: I expect the deficit to expand slightly to $50.5bn (5.8% of GDP) from an estimated $44.9bn (5.9% of GDP) this year. Recall that Turkey had experienced such large deficits before. However, back then, the long term capital flows was the key financing tool, whereas today portfolio inflows constitute the major source. I believe that unless Turkey’s growth prospects are impaired and the government deviates from the fiscal framework depicted in the Medium Term Program, there is a great deal of chance that Turkey would be upgraded to the investment grade category next year. Such a rating move would improve Turkey’s risk profile, bolstering long term loans and foreign direct investment to the country. In that sense, I am less worried about the towering current account deficit.
4) Inflation: In line with the slowdown in GDP, the inflation outlook shall remain benign. Note that core inflation has been surfacing at a record low 2.5% over the last two months, despite the headline CPI is boosted by tax adjustments and food prices. However, with the partial correction in food prices in November, the annual CPI receded to 7.3%. The CPI is set to keep heading south in the upcoming months, easing even below 5% by February. Such a gigantic fall is linked to the high base year effect and the decline is set to be replaced by a slight uptrend later in the year, bringing the CPI to 6.0% by the end of 2011.
The key assumption that feeds our baseline scenario is that the global economy continues to recover and the risk appetite, which is important for the fund flows, does not get hurt due to additional uncertainty surrounding the global economy. Amidst the ongoing concerns regarding the European debt crisis and the fears that it may spread to bigger members, the delay of the fiscal consolidation in the U.S. may significantly hinder the internal and external rebalancing acts that are needed for a strong, balanced and sustained world recovery (*). This sluggishness has so far thwarted a strong and balanced post-crisis recovery and created uncertainty regarding its sustainability.
(*) Internal rebalancing: When private demand collapsed, fiscal stimulus helped alleviate the fall in output. But fiscal stimulus has to eventually give way to fiscal consolidation, and private demand must be strong enough to take the lead and sustain growth. External rebalancing: Many advanced economies, most notably the United States, which relied excessively on domestic demand, must now rely more on net exports. Many emerging market economies, most notably China, which relied excessively on net exports, must now rely more on domestic demand. “ World Economic Outlook, October 2010, foreword by Economic Counsellor Oliver Blanchard.
Under this broad picture;
1) Growth: I envisage that the economy would post a slower 5.0% growth next year, after expanding by a robust 8.0% this year.
2) Employment and Unemployment Rate: I anticipate unemployment rate falling to 11.9% on average this year, down from 14.0% in 2009. On the other hand, the downtrend in unemployment rate is likely to slow next year in tandem with a softer economic growth. Due to the high rate of growth in population at 1.5% and to the migration of labor force from agricultural sector to the other sectors, I believe that only a limited 0.5 pp drop in unemployment rate to 11.4% can accompany the economic growth that we estimate for next year.
3) Current Account Deficit and External Financing: I expect the deficit to expand slightly to $50.5bn (5.8% of GDP) from an estimated $44.9bn (5.9% of GDP) this year. Recall that Turkey had experienced such large deficits before. However, back then, the long term capital flows was the key financing tool, whereas today portfolio inflows constitute the major source. I believe that unless Turkey’s growth prospects are impaired and the government deviates from the fiscal framework depicted in the Medium Term Program, there is a great deal of chance that Turkey would be upgraded to the investment grade category next year. Such a rating move would improve Turkey’s risk profile, bolstering long term loans and foreign direct investment to the country. In that sense, I am less worried about the towering current account deficit.
4) Inflation: In line with the slowdown in GDP, the inflation outlook shall remain benign. Note that core inflation has been surfacing at a record low 2.5% over the last two months, despite the headline CPI is boosted by tax adjustments and food prices. However, with the partial correction in food prices in November, the annual CPI receded to 7.3%. The CPI is set to keep heading south in the upcoming months, easing even below 5% by February. Such a gigantic fall is linked to the high base year effect and the decline is set to be replaced by a slight uptrend later in the year, bringing the CPI to 6.0% by the end of 2011.
The key assumption that feeds our baseline scenario is that the global economy continues to recover and the risk appetite, which is important for the fund flows, does not get hurt due to additional uncertainty surrounding the global economy. Amidst the ongoing concerns regarding the European debt crisis and the fears that it may spread to bigger members, the delay of the fiscal consolidation in the U.S. may significantly hinder the internal and external rebalancing acts that are needed for a strong, balanced and sustained world recovery (*). This sluggishness has so far thwarted a strong and balanced post-crisis recovery and created uncertainty regarding its sustainability.
(*) Internal rebalancing: When private demand collapsed, fiscal stimulus helped alleviate the fall in output. But fiscal stimulus has to eventually give way to fiscal consolidation, and private demand must be strong enough to take the lead and sustain growth. External rebalancing: Many advanced economies, most notably the United States, which relied excessively on domestic demand, must now rely more on net exports. Many emerging market economies, most notably China, which relied excessively on net exports, must now rely more on domestic demand. “ World Economic Outlook, October 2010, foreword by Economic Counsellor Oliver Blanchard.
3 Aralık 2010 Cuma
Now it is your turn...
Summary: While the slowdown in the global economy and in Turkey expected for the second half of the year remained limited in Q3, there seems to be a revival in Q4. This should keep pushing up the consensus growth forecast for 2010. However, the growth estimates for 2011 is at reasonable levels. That limits the room for surprises from either side and inflation appears to be a more important theme for markets next year, as it is more exposed to surprises. The inflation forecasts for next year are quite high, preparing an appropriate ground for positive surprises.
We will see the third quarter growth performance in Turkey when the GDP figures are released on next Friday. After the data, the consensus for the overall year is likely to keep being upgraded from 7.0% print of the last survey. I believe this is quite important, considering the fact that the uninterrupted increase in the growth forecasts this year has become the key driver of the markets. The tight relation between the forward-looking expectations and the market performance would most likely be valid in the upcoming years, as well. The average GDP estimate has come all the way up to 7.0% in the last Central Bank expectation survey from the initial 3.3% in the beginning of the year, exploring the big potential for a positive surprise when the expectations are set irrationally low. In essence, there is still upside potential for the consensus. However, it is time to focus on 2011 expectations as we approach the new year.
Regarding the next year’s growth prospects, two important aspects would determine the outcome. Starting with the favorable one, the leading indicators suggest that the economic activity has picked up in the last quarter of the year and this momentum is highly likely to be preserved in the next year. Technically speaking, the seasonally adjusted industrial output that has recovered to pre-crisis levels would sustain quite strong year-on-year growth rates. Moreover, as suggested by the PMIs, the economic activity has been gaining steam globally which is an assuring factor for the sustainability of the revival at home. Nevertheless, this support from the global backdrop would be valid only if the heightened worries regarding the European debt crisis and the Fed’s launch of the second phase of the quantitative easing program, do not jeopardize the business and consumer confidence. Coming to the dismal aspect of growth dynamics for the year ahead, the GDP growth is set to reach 8% this year and this robust performance would form an unfavorable base year effect for 2011. In that context, the 4.8% average forecast for next year’s GDP is neither low nor high, limiting the surprise from either side.
Therefore, even though the GDP forecast continue playing an important role, the inflation forecasts are likely to replace as the more dominant market driver in 2011. Until then, the data disclosures regarding the growth outlook would continue to be attractive for markets. As we said before, all the leading indicators (capacity use, reel sector confidence index, Turkish PMI and consumer confidence) suggest acceleration of economic activity in the last quarter of this year. For a quick flash back, in the first half of the year both the leading indicators and the hard data for output had implied a strong growth performance, which was then replaced by a slower performance due to the European debt problems. Rather than suffering a contraction, output remained flat during May-September period. The other country groups also displayed a similar performance, with their seasonally adjusted industrial production lacking any visible improvement in that period. However, this standstill position shall change from October onwards. As is known, the hard data is two-month backward-looking and we expect to see the activity gaining ground in October. This remains to be confirmed when the October industrial output figure is disclosed on December 8th. On year-on-year comparisons, the industrial output is to enjoy 10% growth in the first month of the last quarter, after expanding by 10% in the third quarter and 13.5% in the first 9 months of the year. At first look, this seems to indicate a similar performance to the third quarter. However, in reality, my estimate implies a seasonally adjusted 2.4% m/m increase and suggests acceleration. The 6.1% consensus for the industrial output is below my forecast. The second important data of the week is the Q3 GDP due December 10th. My forecast is 6.2% y/y expansion. If our call turns out to be true, this would urge the markets to upgrade their 7% forecast for the overall 2010. Otherwise, Q4 GDP growth would need to come at a subdued 1.5% or lower in order to be consistent with 7% growth for the year. If industrial output expands as rapidly as we expect in October, the odds of such a weak performance would get even lower.
If the data disclosures mentioned here come in line with our forecasts, the Central Bank would narrow the output gap forecast when they release the Inflation Report in January. By itself, this outlook would normally urge for earlier rate hikes. At that point, the inflation pattern would play an important role to prevent the markets revising their rate hike forecasts to an earlier date than the last quarter of the year, as the recent polls suggest.
In that context, the key market theme to follow next year is whether the annual CPI would recede to the 5-6% interval from the first months onwards, in line with the Central Bank’s presumptions. It seems that the upward pressure on inflation has been building up, given the industrial output that is poised to return to pre-crisis levels, along with the recovery of the capacity use to long term averages and the ongoing improvement in labor market. This outlook makes the pricing behavior more important than ever. The underlying inflation trend that is best gauged by the core indices and the service sector prices suggest that there is no visible deterioration yet and the benign pattern is still on track. However, after displaying a sluggish performance when coming out of the recession, Turkish economy has now been pulled into an unbalanced growth structure on the back of robust domestic demand and weak external demand. While this outlook warns against threats to financial stability on one hand, it at the same time raises the question marks regarding the policy reaction of the Central Bank. It is true that the inflation is hovering above the official target and is set to overshoot the year-end target. However, acknowledging that the food component contributes some 4.7 pp to the headline CPI and the annual inflation in the unprocessed food component is at a record high 31.3% as of October, there is a large potential of decline in their contributions going forward and that in turn makes any policy reaction unnecessary. Unless the inflationary pressures become widespread and the inflation in non-food and non-energy segments deteriorates, a wait-and-see approach, accompanied with measures to prevent excess credit expansion, is worth to try, despite all the ambiguities regarding its effectiveness.
We will see the third quarter growth performance in Turkey when the GDP figures are released on next Friday. After the data, the consensus for the overall year is likely to keep being upgraded from 7.0% print of the last survey. I believe this is quite important, considering the fact that the uninterrupted increase in the growth forecasts this year has become the key driver of the markets. The tight relation between the forward-looking expectations and the market performance would most likely be valid in the upcoming years, as well. The average GDP estimate has come all the way up to 7.0% in the last Central Bank expectation survey from the initial 3.3% in the beginning of the year, exploring the big potential for a positive surprise when the expectations are set irrationally low. In essence, there is still upside potential for the consensus. However, it is time to focus on 2011 expectations as we approach the new year.
Regarding the next year’s growth prospects, two important aspects would determine the outcome. Starting with the favorable one, the leading indicators suggest that the economic activity has picked up in the last quarter of the year and this momentum is highly likely to be preserved in the next year. Technically speaking, the seasonally adjusted industrial output that has recovered to pre-crisis levels would sustain quite strong year-on-year growth rates. Moreover, as suggested by the PMIs, the economic activity has been gaining steam globally which is an assuring factor for the sustainability of the revival at home. Nevertheless, this support from the global backdrop would be valid only if the heightened worries regarding the European debt crisis and the Fed’s launch of the second phase of the quantitative easing program, do not jeopardize the business and consumer confidence. Coming to the dismal aspect of growth dynamics for the year ahead, the GDP growth is set to reach 8% this year and this robust performance would form an unfavorable base year effect for 2011. In that context, the 4.8% average forecast for next year’s GDP is neither low nor high, limiting the surprise from either side.
Therefore, even though the GDP forecast continue playing an important role, the inflation forecasts are likely to replace as the more dominant market driver in 2011. Until then, the data disclosures regarding the growth outlook would continue to be attractive for markets. As we said before, all the leading indicators (capacity use, reel sector confidence index, Turkish PMI and consumer confidence) suggest acceleration of economic activity in the last quarter of this year. For a quick flash back, in the first half of the year both the leading indicators and the hard data for output had implied a strong growth performance, which was then replaced by a slower performance due to the European debt problems. Rather than suffering a contraction, output remained flat during May-September period. The other country groups also displayed a similar performance, with their seasonally adjusted industrial production lacking any visible improvement in that period. However, this standstill position shall change from October onwards. As is known, the hard data is two-month backward-looking and we expect to see the activity gaining ground in October. This remains to be confirmed when the October industrial output figure is disclosed on December 8th. On year-on-year comparisons, the industrial output is to enjoy 10% growth in the first month of the last quarter, after expanding by 10% in the third quarter and 13.5% in the first 9 months of the year. At first look, this seems to indicate a similar performance to the third quarter. However, in reality, my estimate implies a seasonally adjusted 2.4% m/m increase and suggests acceleration. The 6.1% consensus for the industrial output is below my forecast. The second important data of the week is the Q3 GDP due December 10th. My forecast is 6.2% y/y expansion. If our call turns out to be true, this would urge the markets to upgrade their 7% forecast for the overall 2010. Otherwise, Q4 GDP growth would need to come at a subdued 1.5% or lower in order to be consistent with 7% growth for the year. If industrial output expands as rapidly as we expect in October, the odds of such a weak performance would get even lower.
If the data disclosures mentioned here come in line with our forecasts, the Central Bank would narrow the output gap forecast when they release the Inflation Report in January. By itself, this outlook would normally urge for earlier rate hikes. At that point, the inflation pattern would play an important role to prevent the markets revising their rate hike forecasts to an earlier date than the last quarter of the year, as the recent polls suggest.
In that context, the key market theme to follow next year is whether the annual CPI would recede to the 5-6% interval from the first months onwards, in line with the Central Bank’s presumptions. It seems that the upward pressure on inflation has been building up, given the industrial output that is poised to return to pre-crisis levels, along with the recovery of the capacity use to long term averages and the ongoing improvement in labor market. This outlook makes the pricing behavior more important than ever. The underlying inflation trend that is best gauged by the core indices and the service sector prices suggest that there is no visible deterioration yet and the benign pattern is still on track. However, after displaying a sluggish performance when coming out of the recession, Turkish economy has now been pulled into an unbalanced growth structure on the back of robust domestic demand and weak external demand. While this outlook warns against threats to financial stability on one hand, it at the same time raises the question marks regarding the policy reaction of the Central Bank. It is true that the inflation is hovering above the official target and is set to overshoot the year-end target. However, acknowledging that the food component contributes some 4.7 pp to the headline CPI and the annual inflation in the unprocessed food component is at a record high 31.3% as of October, there is a large potential of decline in their contributions going forward and that in turn makes any policy reaction unnecessary. Unless the inflationary pressures become widespread and the inflation in non-food and non-energy segments deteriorates, a wait-and-see approach, accompanied with measures to prevent excess credit expansion, is worth to try, despite all the ambiguities regarding its effectiveness.
26 Kasım 2010 Cuma
The rain in Spain stays mainly in the plain...
Summary: For those who want to see the glass half empty, the EU debt crisis has arisen as the most commonly used argument. In that context, Ireland has become an easy target to attack as the country has one of the most rapidly growing public debt stocks. However the real concern is the possible spill over of the debt saga to more important and bigger countries of Europe, such as Spain. However, Spain has one advantage (residents have a greater share in the debt market) that is not valid for the smaller EU countries. Turkey is in a relatively more advantageous position, as the country has not suffered any deterioration in the debt dynamics and the government debt is mostly owned by the residents. Turkey’s distinct position has been priced by the markets, while it is the rating agencies’ turn to reflect these favorable aspects to credit ratings.
The Eurozone debt crisis, China’s measures to cool off the economy and U.S. labor market that has failed to enjoy a meaningful rebound so far… All have become the major themes this year that feed into the pessimistic views regarding the global economy. These topics happened to be used alternately to justify the stock market sell-offs observed in the long term upward trend. The combination of all of these unpleasant factors tends to exaggerate the pressure even further. The markets have been suffering such bearishness over the last days that dampen the global risk appetite. The stock markets and the bond yields are tumbling, accompanied with a higher U.S. Dollar, lower commodity prices, yet a more valuable gold. Fortunately, the deterioration in sentiment seems to have remained limited. What then is preventing the gauges of risk appetite, such as the VIX index from climbing as extensively as was the case during the Greece debt crisis in May? One reason is that the EU acted quickly to launch the support mechanism, which is co-financed by the IMF (EFSF – European Financial Stability Facility), while the other reason is the relatively small size of Irish economy, like Greece. However, the severity of the problems regarding Ireland is not proportional to the size of the economy. The banking sector in Ireland has grown more than three times as big as GDP, with the main creditors being the private banks of big European countries. Therefore unlike Greece, where the public finances constitute the roots of the crisis, in the case of Ireland there is this fear of contagion to other countries. The real concern is the possibility of the debt problems spreading to more important countries in Europe, such as Spain, where CDS has already climbed to 310 bps, a warning that this risk has started to be partially priced. In order to soothe the fears about Ireland, the EU officials soon announced that some EUR80-90bn may be drawn from the EFSF to bail out Ireland. The details of the rescue package are expected to be shaped at the EU finance ministers’ summit on December 7th. In due course, the ECB has been providing EUR130bn to the Irish banks that correspond to 20% of their total assets. Ireland and Greece have the fastest growing public debt and explains why these countries have become targets for the markets.
At this point, one can question why other countries in the top 5, such as Japan, U.K. and the U.S. do not face similar pressure. We believe that the answer lies at the composition of the creditors. Non-residents own more than 70% of the total government debt instruments in countries like Greece, Ireland and Portugal. This structure of the bond market, where residents have much less power, intensifies the dismal impact from sell-off pressure during periods of surging fears regarding the public debt. Whereas, countries such as Japan, Canada or the U.K can avoid panic more easily, since the public debt is mostly owned by residents. In that context, Portugal and Spain which are often speculated to be the next destination of debt crisis stand at a distinct position and Spain is likely to tackle the pressure more easily despite the recent surge in their risk premiums. Glancing at Turkey’s position, the relatively limited foreign participation in the government debt securities seems to be another advantage for Turkey in the post-crisis environment. In fact, the increase in the debt stock has remained subdued in this period and the share of non-residents is still below 13%, despite some late up-tick. Turkey ranks among the countries with the lowest foreign participation in the public debt market after Japan and Canada. Turkey’s CDS trades at 140 bps as of November 25th, lagging below most developed and developing nations.
While the financial markets rate Turkey’s credit worthiness in the “investment grade,” thanks to the favorable growth performance that improves debt dynamics, there has also been improvement in the rating agencies’ view on the country. The outlook has been upgraded to positive on November 24th by Fitch, who already sees Turkey closer to the investment grade than their peers do. With this move, the big difference between the market valuations and the credit ratings tend to narrow a little bit. Fitch noted that implementation of fiscal policy consistent with a downward trend in the government debt-to-GDP ratio could result in upgrade, adding that if Turkey comes through parliamentary elections and prospective constitutional amendments without a material increase in political instability this would also be supportive. Gathering all these statements, it is understood that the earliest possible timing for upgrade would be after the general elections in mid-2011. This expectation would remain as a catalyst for relative strength of TRY assets.
The Eurozone debt crisis, China’s measures to cool off the economy and U.S. labor market that has failed to enjoy a meaningful rebound so far… All have become the major themes this year that feed into the pessimistic views regarding the global economy. These topics happened to be used alternately to justify the stock market sell-offs observed in the long term upward trend. The combination of all of these unpleasant factors tends to exaggerate the pressure even further. The markets have been suffering such bearishness over the last days that dampen the global risk appetite. The stock markets and the bond yields are tumbling, accompanied with a higher U.S. Dollar, lower commodity prices, yet a more valuable gold. Fortunately, the deterioration in sentiment seems to have remained limited. What then is preventing the gauges of risk appetite, such as the VIX index from climbing as extensively as was the case during the Greece debt crisis in May? One reason is that the EU acted quickly to launch the support mechanism, which is co-financed by the IMF (EFSF – European Financial Stability Facility), while the other reason is the relatively small size of Irish economy, like Greece. However, the severity of the problems regarding Ireland is not proportional to the size of the economy. The banking sector in Ireland has grown more than three times as big as GDP, with the main creditors being the private banks of big European countries. Therefore unlike Greece, where the public finances constitute the roots of the crisis, in the case of Ireland there is this fear of contagion to other countries. The real concern is the possibility of the debt problems spreading to more important countries in Europe, such as Spain, where CDS has already climbed to 310 bps, a warning that this risk has started to be partially priced. In order to soothe the fears about Ireland, the EU officials soon announced that some EUR80-90bn may be drawn from the EFSF to bail out Ireland. The details of the rescue package are expected to be shaped at the EU finance ministers’ summit on December 7th. In due course, the ECB has been providing EUR130bn to the Irish banks that correspond to 20% of their total assets. Ireland and Greece have the fastest growing public debt and explains why these countries have become targets for the markets.
At this point, one can question why other countries in the top 5, such as Japan, U.K. and the U.S. do not face similar pressure. We believe that the answer lies at the composition of the creditors. Non-residents own more than 70% of the total government debt instruments in countries like Greece, Ireland and Portugal. This structure of the bond market, where residents have much less power, intensifies the dismal impact from sell-off pressure during periods of surging fears regarding the public debt. Whereas, countries such as Japan, Canada or the U.K can avoid panic more easily, since the public debt is mostly owned by residents. In that context, Portugal and Spain which are often speculated to be the next destination of debt crisis stand at a distinct position and Spain is likely to tackle the pressure more easily despite the recent surge in their risk premiums. Glancing at Turkey’s position, the relatively limited foreign participation in the government debt securities seems to be another advantage for Turkey in the post-crisis environment. In fact, the increase in the debt stock has remained subdued in this period and the share of non-residents is still below 13%, despite some late up-tick. Turkey ranks among the countries with the lowest foreign participation in the public debt market after Japan and Canada. Turkey’s CDS trades at 140 bps as of November 25th, lagging below most developed and developing nations.
While the financial markets rate Turkey’s credit worthiness in the “investment grade,” thanks to the favorable growth performance that improves debt dynamics, there has also been improvement in the rating agencies’ view on the country. The outlook has been upgraded to positive on November 24th by Fitch, who already sees Turkey closer to the investment grade than their peers do. With this move, the big difference between the market valuations and the credit ratings tend to narrow a little bit. Fitch noted that implementation of fiscal policy consistent with a downward trend in the government debt-to-GDP ratio could result in upgrade, adding that if Turkey comes through parliamentary elections and prospective constitutional amendments without a material increase in political instability this would also be supportive. Gathering all these statements, it is understood that the earliest possible timing for upgrade would be after the general elections in mid-2011. This expectation would remain as a catalyst for relative strength of TRY assets.
12 Kasım 2010 Cuma
From Disorder To This Order…
Summary: There has been a loss of faith in the current international financial system which was hit so deeply in the global crisis that the problems have been extended to this day. Accordingly, the suggestions for building a new global order are blowing up over the recent period. The members of the G20 are seeking a solution by not just talking but also pushing hard their policy options to speed up the way to the new equilibrium. Turkey is close to acquiring a stronger power in IMF and therefore having a greater responsibility in the international decision making arena.
Amidst the ongoing concerns over the global economy, the G20 leaders are dealing with a long agenda at their meeting on November 11th and 12th. The differences of views among countries seem to have become more visible after the Fed launched the new quantitative easing program on November 3rd. The emerging market members of the G20 group, including Turkey are expected to voice their concerns about the loose monetary policy of U.S. at the summit. In advance of the G20 meeting, World Bank President Zolleick proposed a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values. We are not sure how seriously his comments are taken, but his thesis has drawn quite a lot of attention. What he is basically suggesting is to include Chinese Yuan to the synthetic currency unit SDR, which is composed of U.S. Dollar, Euro, Yen and Pound. On the other hand, there were two key propositions circulated in the media after the previous G20 meetings. One of them is the U.S. plan that advocates limiting the C/A balance by 4% of GDP. Based on IMF 2010 forecasts, the U.S. and Japan do not violate this rule with their 3.2% deficit and 3.1% surplus, respectively. China is close to the limit, as the country’s surplus is foreseen narrowing to 4.7% this year from 9% in 2008. On the other hand, in addition to the developed Asia such as Taiwan (+10%) and Hong Kong (+8.3%), Germany (6.1%) which is Europe’s engine of growth has excessive surplus. Turkey is also in the group of countries that exceed the suggested border line. Among the BRIC countries, Brazil and India have 2.6% and 3.1% deficit, in the same order, while Russia has 4.7% surplus. Some small countries even face high two-digit external balance ratios, yet they do not play a meaningful role in the global imbalances. Therefore, rather than agreeing on a quantitative target, G20 is likely to focus on the systemically important countries and carry on studies to determine the sustainable levels of C/A balance.
The second hot topic may be the banking regulations. The Financial Stability Board, the global body that implements the G20’s communiqués, is told to be mulling on a list of systemically important bank lists which would be subject to separate regulations. Financial Times claimed two separate systemic bank lists would be created, ‘the first with an estimated 20 global banks whose failure would pose a risk to the international financial system. The second would be a country-by-country list of banks that are systemically important within their home economies, but pose little danger to the world.’ Based on these criteria, Japan and China seem to be exempted given their limited international presence. In due course, the decision on a globally set capital surcharge for systemically important banks, that is in essence the core of arguments, may be delayed. On October 22nd, Deputy Prime Minister Babacan told in an interview with AA news agency that “they should decide about the big banks and start implementing it soon.” His remarks hinted that there are two separate lists being prepared for G20. Therefore, the big and systemically important banks in Turkey will likely take place in the second list. However, it is yet uncertain whether being in that list would be advantageous.
Another important issue for Turkey would be any change in the voting power in International Monetary Fund, a topic to be discussed at G20 summit as well. As in known, the Group of 20 leading economies has reached an agreement on a reform of the IMF’s quota and governing structure on November 5th to give a bigger voice to developing countries. With this reform, G20 agreed to double the IMF’s quotas (SDR476.8). The European countries will give up two of their eight seats on the 24-member board, giving more weight to emerging universe. Turkey, being raised to a quota of 0.98%, i.e. the 20th biggest share in IMF, is claimed to benefit the new structure and to gain one of those seats, based on the recent news flow. In the current mechanism, Turkey is being represented by Belgium.
Prior to the G20 summit, the focus was on especially the Chinese data. The large foreign trade surplus in October, together with strong industrial output that expanded by a rapid 13.1% and the inflation that surged to 4.4%, overshooting the Central bank target at 3% all justified China’s efforts to cool down the economy, such as the increase in policy rate and required reserve ratio. The risks to inflation and the additional quantitative easing in the U.S. seem to be putting China in a difficult position. If the country does not want to cool off the economy, they may eventually let Yuan appreciate in order to mitigate the inflationary pressures. Such a policy action would help reduce the global imbalances at a faster pace. U.S. Treasury Secretary Geithner emphasized this point at G20 summit in Seoul by saying that “China cannot continue to resist upward market pressure on its Yuan currency without facing higher inflation and rising asset prices.” He also said that “If you resist those market forces that are just a reflection of confidence that you're going to see strong growth in China, strong productivity growth in China, if you resist those market forces, that pressure is not going to go away it is just going to end up in higher inflation or higher asset prices and that'll be bad for China," while claiming that “China will be more confident in allowing Yuan rise if competitors’ currencies rise too. “
Amidst the ongoing concerns over the global economy, the G20 leaders are dealing with a long agenda at their meeting on November 11th and 12th. The differences of views among countries seem to have become more visible after the Fed launched the new quantitative easing program on November 3rd. The emerging market members of the G20 group, including Turkey are expected to voice their concerns about the loose monetary policy of U.S. at the summit. In advance of the G20 meeting, World Bank President Zolleick proposed a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values. We are not sure how seriously his comments are taken, but his thesis has drawn quite a lot of attention. What he is basically suggesting is to include Chinese Yuan to the synthetic currency unit SDR, which is composed of U.S. Dollar, Euro, Yen and Pound. On the other hand, there were two key propositions circulated in the media after the previous G20 meetings. One of them is the U.S. plan that advocates limiting the C/A balance by 4% of GDP. Based on IMF 2010 forecasts, the U.S. and Japan do not violate this rule with their 3.2% deficit and 3.1% surplus, respectively. China is close to the limit, as the country’s surplus is foreseen narrowing to 4.7% this year from 9% in 2008. On the other hand, in addition to the developed Asia such as Taiwan (+10%) and Hong Kong (+8.3%), Germany (6.1%) which is Europe’s engine of growth has excessive surplus. Turkey is also in the group of countries that exceed the suggested border line. Among the BRIC countries, Brazil and India have 2.6% and 3.1% deficit, in the same order, while Russia has 4.7% surplus. Some small countries even face high two-digit external balance ratios, yet they do not play a meaningful role in the global imbalances. Therefore, rather than agreeing on a quantitative target, G20 is likely to focus on the systemically important countries and carry on studies to determine the sustainable levels of C/A balance.
The second hot topic may be the banking regulations. The Financial Stability Board, the global body that implements the G20’s communiqués, is told to be mulling on a list of systemically important bank lists which would be subject to separate regulations. Financial Times claimed two separate systemic bank lists would be created, ‘the first with an estimated 20 global banks whose failure would pose a risk to the international financial system. The second would be a country-by-country list of banks that are systemically important within their home economies, but pose little danger to the world.’ Based on these criteria, Japan and China seem to be exempted given their limited international presence. In due course, the decision on a globally set capital surcharge for systemically important banks, that is in essence the core of arguments, may be delayed. On October 22nd, Deputy Prime Minister Babacan told in an interview with AA news agency that “they should decide about the big banks and start implementing it soon.” His remarks hinted that there are two separate lists being prepared for G20. Therefore, the big and systemically important banks in Turkey will likely take place in the second list. However, it is yet uncertain whether being in that list would be advantageous.
Another important issue for Turkey would be any change in the voting power in International Monetary Fund, a topic to be discussed at G20 summit as well. As in known, the Group of 20 leading economies has reached an agreement on a reform of the IMF’s quota and governing structure on November 5th to give a bigger voice to developing countries. With this reform, G20 agreed to double the IMF’s quotas (SDR476.8). The European countries will give up two of their eight seats on the 24-member board, giving more weight to emerging universe. Turkey, being raised to a quota of 0.98%, i.e. the 20th biggest share in IMF, is claimed to benefit the new structure and to gain one of those seats, based on the recent news flow. In the current mechanism, Turkey is being represented by Belgium.
Prior to the G20 summit, the focus was on especially the Chinese data. The large foreign trade surplus in October, together with strong industrial output that expanded by a rapid 13.1% and the inflation that surged to 4.4%, overshooting the Central bank target at 3% all justified China’s efforts to cool down the economy, such as the increase in policy rate and required reserve ratio. The risks to inflation and the additional quantitative easing in the U.S. seem to be putting China in a difficult position. If the country does not want to cool off the economy, they may eventually let Yuan appreciate in order to mitigate the inflationary pressures. Such a policy action would help reduce the global imbalances at a faster pace. U.S. Treasury Secretary Geithner emphasized this point at G20 summit in Seoul by saying that “China cannot continue to resist upward market pressure on its Yuan currency without facing higher inflation and rising asset prices.” He also said that “If you resist those market forces that are just a reflection of confidence that you're going to see strong growth in China, strong productivity growth in China, if you resist those market forces, that pressure is not going to go away it is just going to end up in higher inflation or higher asset prices and that'll be bad for China," while claiming that “China will be more confident in allowing Yuan rise if competitors’ currencies rise too. “
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